WORKING CAPITAL
ASSESSMENT
What is Working Capital ?
Funds required to acquire current
assets to enable business/industry
to operate at the expected levels.
CONCEPTS OF WORKING CAPITAL
 GROSS WORKING
CAPITAL = CA
These are in the system used/ consumed on a
day to day basis.
 NET WORKING
CAPITAL = CA – CL
OR
(SHF + TL) – (NFA + NCA)
NWC is the entrepreneur's margin available in
the system from Long term Funds
What are Current Assets ?
Assets which normally get converted
into cash during the operating cycle
of the firm.
 Cash & Bank balances
 Inventory
 Receivables
 Advances to suppliers/others
Other Current assets
What are Working Capital Sources?
 Own
funds
 Bank borrowings
 Sundry Creditors
 Advances from customers
 Deposits due in a year
 Other current liabilities
OPERATING CYCLE
…...begins with acquisition of raw materials and
ends with collection of receivables.
Stages:
1) Raw materials (RM/RM consumption)
2) Work-in-process (WIP/COP)
3) Finished Goods (FG/COS)
4) Receivables (Debtors/Credit sales)
Less:
Creditors (creditors/purchases)
Length of Operating Cycle
Cash
Cash
Receivables
Cash
Receivables
Raw Materia
Service
Trade
Industry
Finished Goods
Receivables
Stocks
Semi Finished Goods
FACTORS INFULENCING WORKING
CAPITAL REQUIREMENT
Nature of business –
service/trade/manufacturing.
Seasonality of operations – peak/non peak
Production Policy – Constant/seasonal
Market conditions- competition/credit terms
Conditions of supply of RM/stores/spares etc.
Quantum of production/Turnover(level of
activity)
Operating Cycle
Current Assets to be maintained
DATA TO BE OBTAINED
Application.
Financial Statements of Previous
years
Estimates/ Projections (with
quantitative details)
Working Capital Finance
A) Fund Based
Inventory finance and
Bill Finance ( Post Sales Finance).
B) Non Fund Based
Letter of Credit (LC)
Bank Guarantee.
Assessment Methods
Operating Cycle Method
Service Sector
Traders
Manufacturing Activity.
Drawing Power Method.
Turnover Method.
…. Assessment Methods
MPBF method (II method of lending) for
limits of Rs 6.00 crores and above
Cash Budget method
(Reason: Based on procurement and cash inflow)



Seasonal Industries (Sugar/ Rice
Mills/Textiles/Tea/Tobacco/Fertilizers)
Contractors & Real Estate Developers
Educational Institutions
Operating Cycle Method
Working capital requirement
Operating expenses
--------------------------------------No. of operating cycles in a year
Operating Cycle Method
A. Length of operating Cycle
a. Procurment of Raw Material
b. Conversion / Process time
c. Average time of holding of FG
d. Average Collection Period
e.Operating Cycle (a+b+c+d)
30 days
15 days
15 days
30 days
90 days
f. Operating Cycle in a year (365days/e) 4 cycle
…..Operating Cycle Method
 B. Total Operating Expenses per
Rs 60.00 lakhs
Annum
C. Total Turnover per Annum
Rs 70.00 lakhs
D. Working Capital Requirement
= Total Operating Expenses (B)/ No.
of operating Cycle (f as said earlier)
Rs 15 lakhs
Drawing Power Method
(for units with small limits)
(Rs.in lacs)
Particulars
Paid stocks (RM-Creditors)
Semi Finished goods
Finished goods
Book debts
Total
Stock value Margin
4
25%
4
50%
4
25%
4
50%
16
DP
3
2
3
2
10
Turnover Method
(originally suggested by Nayak Committee for SSI units)
Applicable for limits upto Rs.6 crores
A Sales Turnover
B 25% of sales Turnover
C 5% of Sales Turnover projected as margin
D Actual NWC existing as per Last Financial
Statement
E B–C
F
B–D
G MPBF (E or F whichever is less)
H Additional margin to be brought in (C-D)
MPBF Method
Tandon’s II method of lending)
A
B
C
D
Current Assets
Current Liab. other than Bank Borrowings
Working Capital gap (A-B)
Minimum Stipulated NWC
(25% of CA excluding export receivables)
E
F
G
H
I
Actual/projected NWC
C–D
C–E
MPBF (F or G whichever is less)
Excess borrowings/short fall in NWC (D-E)
Justifications of the Performance Projection
(Inventory/Receivable Norms – Comparison)
 Intra firm Comparison
 Comparison of estimates with previous years
Actuals.
For New Units
 Comparison of estimates with similar units in
the area of operation.
 Higher projections shall be justified.
MPBF Method
Tandon’s II method of lending)
Excess
borrowing ( short fall in
NWC ) shall be ensured by
additional funds to be brought
in by the applicant or by
additional bank finance over
MPBF.
Important Aspects of MPBF method
Production/Sales estimates
Profitability estimates
Inventory/receivables norms
Build up of Net Working Capital
Cash Budget
Statement showing forecast of cash receipts, cash
payments and net cash balance over a period of time
Months->
1 2 3 4 5 6 7 8 9 10 11 12
Cash Receipts
Cash Payments
Surplus/deficit
Cash credit – OB
Cash credit - CB
Peak deficit is financed and drawings regulated by monthly budgets
Cash Budget
Advantages:
•Suitable for seasonal industries, contractors, software
exporters etc.
Limitations:
•Will not reflect changes in various current assets and
liabilities.
•Will it give a clue whether a company is earning
•profit or not.
Funds flow statement is required to detect any diversion
of funds.
BIFURCATION OF FUND BASED LIMITS
Inventory: OCC/KCC/PC/COD/SOD
Bills
: CBP/DBP/SBP/FBP
CUBD/DUBD/FUBD
 Inventory Limit
A. Total Inventory
B. Creditors
C. Margin
D. Paid Inventory (A-B)
E. Inventory Limit ( D-C)
(Cont…)
….BIFURCATION OF FUND BASED
LIMITS

Bills /Book Debts Limit
A. Receivables/ Sundry Debtors
B. Margin
C. Bills Limit ( A-B).
 Loan delivery system (FB W/C limits of
Rs.10 crores & above from banking system)
Cash Credit - 20%
Demand Loan – 80%
Loan Delivery System

Objectives
 Loan delivery system (FB W/C limits of
Rs.10 crores & above from banking system)
Cash Credit - 20%
Demand Loan – 80%


Domestic Credit portion to be bifurcated into
loan component and Cash Credit
Relaxation.
Bill Finance -Post Sales Finance
(For Genuine Trade & Manufacturing Transactions)
A.
A.
B.
C.
DBPs : Bills of Exchange accompanied with ;
I) Invoice and
ii) Documents of title of the Goods - LRS/RRS
DUBD : Invoice /LRS / RRS – Maximum Tenor 180
days
CUBD : Bill of Exchange / Promissory Notes.
- Eligibility Carved out of MPBF
Export Bills : FBP/FUBD
- Security – Export Documents drawn against
confirmed orders / LCs.
…Bill Finance -Post Sales Finance
(For Genuine Trade & Manufacturing Transactions)
A.
Book Debts Finance :
A. Service Industry / Contractors
B. Margin 50%
C. Age not more than 90 days
D. Collateral Security – 200% Urban / Semi
Urban Security.
Non Fund Based Limits
Letter of credit
ILC/FLC
Usance/Sight
Bank Guarantee
Performance
Financial – Bid Bonds/Security Deposits/
Mobilisation advance/retention money
Deferred Payment Guarantee
LC Assessment
1
Annual purchase/import
2
3
4
5
6
7
Out of (1) on credit basis
Out of (2) on usance LC basis
Average of (3) per month
Lead time (no. of months)
Usance period (no. of months)
Usance LC requirement (5+6) X (4)
FLC/ILC
Guidelines to be followed
For constituents borrowers with regular
sanctioned credit facilities for genuine
transactions.
LCs shall not be opened with clause without
recourse to drawer.
Bank Guarantees:
Performance and Financial Guarantees
Purpose / Difference
Security: Cash Margin +Counter Guarantee
+Collateral Security (Immovable / Liquid Security)
Restrictive Clause.
Important Ratios
Current Ratio (CA/CL)
(norm – 1.15 upto Rs.6 crores/1.33 for above)
Adjusted Current Ratio
(reduce export bills discounted from BB & CA)
Total debt equity (TOL/TNW)
(Maximum norm : 6)
Gearing Ratio (for NFB Limits)
Maximum Norm: 10
Total Outside Liabilities + 100% of NFB Limits
---------------------------------------------------------------------------
Net Worth – (NCA+Investments in associate concerns)
Notes: TOL (excluding Sundry creditors representing stocks procured under LC/BG and
mobilisation advance outstanding against BGs)
NW (excluding Intangible Assets)
NCA (excluding advances given for capital goods for business purpose)
Exposure Norms for some Categories
Category
Constructions
contractors
Ceiling on borrowings
FB + NFB limits shall
not exceed 15 times
net owned funds
Housing Finance Borrowings shall be
restricted to 3 times
Institutions
the net owned funds